Rates to remain on hold despite tough Budget: AMP

Rates to remain on hold despite tough Budget: AMP

The cash rate is likely to remain on hold for months to come even if the federal Budget harms consumer confidence and spending, according to AMP Capital’s chief economist Shane Oliver.

by Staff Reporter

May 13, 2014

Mr Oliver said the clear message from the RBA’s recent quarterly Statement on Monetary Policy is that interest rates will remain on hold for a while yet.

“The RBA only made minor changes to its economic forecasts – seeing growth this year and next of 2.75 per cent, before rising to 3.25 per cent in 2016, with near-term uncertainties remaining around the decline in mining investment and the pick-up in the non-mining economy,” he said.

“While the RBA is allowing for weak public demand, it would probably be loath to have to respond to excessive fiscal austerity by cutting interest rates again for fear of over-stimulating the housing market.”

Mr Oliver added that Australia’s financial situation is not as dire as the government is proclaiming.

“Our concern is that the government has exaggerated the budget problem – it’s a problem, but far from an emergency – and that this, combined with the political cycle which argues in favour of getting the budget pain over with early, will result in the government going too hard in terms of the fiscal austerity,” he said.

“The OECD [Organisation for Economic Co-operation and Development] has rightly warned Australia that ‘heavy loading of fiscal consolidation should be avoided’. Right now, the economy is still a bit fragile with only tentative signs of improvement in the non-mining economy. But this could be snuffed out if the Budget is too tough. The key is to put policies in place that bring long-term spending growth under control, as opposed to adopting too much austerity in the short term. Hopefully this will be the case.”